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nft non-fungible token

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Non-Fungible Token (NFT) Explained

The abbreviation NFT comes from the words Non-Fungible Token. In the early years of cryptocurrencies, creating unique coins was impossible. After 2020, two popular NFT sectors have emerged: NFT art and NFT gaming.

Understanding the value of NFTs requires understanding the digital properties of NFTs. The value of NFTs is based on the investors’ speculation about future price development. The possibilities of NFT technology are almost limitless.

What is an NFT?

The abbreviation NFT comes from the words Non-Fungible Token. The unofficial translation of NFT is a digital certificate of authenticity, but it is mostly seen in official contexts. The abbreviation NFT is used colloquially.

The English word fungible is not that commonly used. It means interchangeability, which is a fundamental property of money. This applies to both physical coins and notes, digital money and cryptocurrencies.

Fungibility means that a 100-dollar bill in your wallet is as valuable as a 100-dollar bill in your friend’s wallet. A dollar in your bank account is as valuable as a dollar in your friend’s account. One bitcoin in one wallet is as valuable as one bitcoin in another wallet.

In addition, you can exchange a hundred-euro dollar for, for example, five 20-dollar bills, and you still have one hundred dollars worth of money. You can also send your friend a transfer of 10 times 0.1 bitcoins instead of one bitcoin.

With NFT, this is not possible. Since NFT is unique (non-fungible), each NFT is also different in value. The easiest way to understand NFT is to think of digital art like images, music, or videos. Each physical painting is unique, and so is digital art.

Splitting an NFT into smaller units is, therefore, not possible. If you buy a Bored Apes NFT, you cannot split it into smaller parts and send one-fifth of this NFT to your friend. NFT is always one whole token (cryptocurrency).

Non-fungible tokens vs other cryptocurrencies

In the early years of cryptocurrencies, creating unique coins was impossible. The predecessor of NFT can be considered the Colored Coin idea introduced in 2012. You can read a more extensive history of NFT at this link.

The NFT scene first rose to widespread awareness in late 2017 with the game CryptoKitties, which, at its worst, clogged the entire Ethereum network in December 2017. Each “cryptokitty” is an NFT on the Ethereum blockchain.

CryptoKitties 2020

The game still exists, and every crypto kitty is, in fact, an NFT. This was also when the Ethereum ERC721 standard was born. It provides a framework and rule set for creating NFTs. Many readers might know ERC20, the standard for normal (fungible) tokens.

A non-fungible token is like a standard token with steroids. It has the same basic features as a fungible token: it is 100% digital, can be sent to anyone, and can be stored in a cryptocurrency wallet. Non-fungible tokens can also be traded on exchanges like standard tokens.

One major difference is that a non-fungible token cannot be divided into smaller pieces. You will soon understand why when we’ll go through NFT use cases.

When we talk about a non-fungible token, it’s critical that one can be sure of its uniqueness. It has to be also verifiable that the number of NFTs is limited. This is why blockchain is so useful. Each token and its supply can be verified at any time.

The next development stage is already here, called the ERC1155 standard. It will make the NFT creation process faster, simpler, and more efficient. Check this article to learn more about the differences between ERC721 and ERC1155.

NFT use cases

After 2020, two popular NFT sectors have emerged: NFT art and NFT gaming. In addition to these, we’ll also explore how NFT technology is used in the sports world.

Digital art: Bored Apes and CryptoPunks

NFT art is easy to understand as a concept. It is about digital artwork, which means images and videos. When buying an NFT, you buy digital artwork, just like a painting in the real world. In the art category, two collections stand out above the rest: Cryptopunks and the Bored Ape Yacht Club. Both have been traded for over $2 billion.

The picture below shows a few NFTs from the Bored Apes collection on the popular OpenSea marketplace.

opensea bayc

The monkey art in the picture is priced at 83 to 87 ETH, around $108,000 to $113,000 at the time of writing. At its highest, one Bored Ape NFT has been priced at $3.4 million. Several Ape NFTs have been sold for over $1 million each.

CryptoPunks is one of the oldest NFT collections. It contains facial images created with simple pixel graphics. The most expensive CryptoPunk is worth a staggering $23 million. Many celebrities and social influencers have used CryptoPunk and Bored Ape NFT as their profile picture on social media.

Both CryptoPunks and Bored Apex collections were created on the Ethereum platform.

NFT games: Axie Infinity and Sorare

Although CryptoPunks and Bored Apes are popular collections, their trading volumes pale compared to Axie Infinity. This is a game using NFT technology. Axie Infinity figures have been traded for more than $4 billion, as much as Cryptopunks and Bored Apes put together.

Axie Infinity is a typical game in which the player acquires an Axie character and battles other players’ Axies. The image below is from the Axie Infinity marketplace.

axie infinity

Each Axie character has different features that make some more valuable than others. Just as in NFT art, some items are more unique than others. The rarer the features, the more people will pay for such NFTs.

Axie Infinity is implemented differently from the art collections mentioned above. Instead of an Ethereum platform, Axie Infinity has its sidechain, Ronin. It also made the news in the spring of 2022 in an unfortunate way, as the token bridge between the Ronin blockchain and Ethereum was hacked for more than $600 million.

Another popular NFT game is Sorare. It combines digital trading cards and fantasy football. The idea is to acquire players from football clubs as trading cards (NFT) and then compete against other collectors. Your card will be awarded points based on how well the player performs in real football matches. Each digital card is an NFT you can own or trade for cash.

Sports NFTs: NBA top shot and FIFA

In addition to art and games, NFT technology has also had a strong presence in the world of sports. The NBA Top Shot, built on the Flow blockchain, has sold over a billion dollars worth of digital moments from the NBA. The collector buys the rights to great NBA moments in a video format.

Football’s governing body, FIFA, also launched its own NFT collection in September 2022. FIFA’s technical partner is Algorand.

Like the NBA top shot, FIFA’s World Cup NFT collection contains goals and other great performances from the history of the World Cups. One NFT is one video clip. These can also be traded on FIFA’s marketplace. NFTs can be transferred to an external Algorand wallet as well.

NFT technology fits perfectly into the world of sports. The technology will also enable the creation of dynamic NFTs. The appearance and data of a dynamic NFT can change based on how a player performs in, for example, a World Cup final. Dynamic NFT is abbreviated as dNFT.

NFTs and metaverses

The term metaverse has emerged in recent years in the context of NFT technology. The two topics are very closely related. If you are unfamiliar with Metaverse, check out our extensive beginner’s guide.

The exact definition of the metaverse is still a bit fuzzy, but it builds primarily on Web 3. A metaverse is often seen as a virtual world where one can interact with other users digitally. The boundary between traditional games and the metaverse can sometimes be challenging to set because of social characteristics.

The idea of a metaverse is digital ownership brought by Web 3, and this is where NFT technology comes in. Decentraland, for example, is a popular metaverse. It is a virtual world where each plot of the digital land is represented as an NFT. You can buy your slot in this world and build different things there.

Sandbox is another popular game in the metaverse niche. It could be called the Web 3 version of the popular Minecraft game.

Metaverses take NFT technology to a new level. Instead of owning a piece of art or a video, you can own a piece of a virtual world where millions of people interact with each other.

You can also invest in the Sandbox and Decentraland games by buying their tokens (SAND or MANA) in Binance.

The Mona Lisa example

Understanding the value of NFTs requires understanding the digital properties of NFTs. If the NFT technology is not in possession, it is impossible to understand the benefits and added value it brings. Because of this, even the idea of a JPG image worth millions of dollars seems completely unbelievable to beginners.

Keep reading to see why NFTs have value.

We answer this question with the help of the Mona Lisa. This is probably one of the best examples of a unique work of art on this planet. The Mona Lisa hangs on the wall of the Louvre in Paris, and everyone knows that Leonardo Da Vinci painted the painting. The Mona Lisa is immeasurably valuable, and nothing is unclear about its authenticity.

European art banner Mona Lisa

This is not the case with digital art. As mentioned earlier, it is very easy to download any image from the web to your computer. You could go to any NFT marketplace, save each image file, and enjoy the art 100% free. So, how can digital art be valuable?

First of all, you can also download the Mona Lisa very easily. Go to Google and download any of the millions of images. You can also buy a poster from the Louvre gift shop or take a photo with your camera. Hang that picture on your wall and enjoy the work of Leonardo Da Vinci 100% free.

You could also hire an artist to make a copy. He could use a similar canvas and frame as Da Vinci did. As long as there has been art, there have been forgeries. Many are done so well that even professionals can’t tell a difference.

There is one important point in all this. You know that your Mona Lisa is fake. This means you have no proof of authenticity. If you ever want to sell your painting, you can’t prove it’s the only Mona Lisa. It doesn’t mean people would pay millions for it because it looks like Mona Lisa.

This is why NFT art is valuable. The blockchain proves you have the original piece. The blockchain shows the history and the current owner of each NFT. You know you got the original one, and so does everyone else.

Both digital and analog art can be copied. Lots of forgeries are being sold in the art industry. There are also fake gold and silver bars with copper inside them. Anything can be counterfeited. What counts is the proof of authenticity and ownership.

If someone wants to enjoy copied digital NFTs or a fake Mona Lisa, we can do nothing about that. However, this person would own nothing of value.

Why are NFTs valuable?

The value of NFTs is based on the investors’ speculation about future price development. The value of NFTs is largely based on the same factors as physical works of art and collectibles. For example, Leonardo Da Vinci’s paintings are valuable due to the appreciation the artist received. Also, the value of an NFT artwork can be high due to the person who created the piece.

However, NFT is significantly different from physical collectibles and boards. NFT is 100% digital, so its value consists only of digital factors. Here are some examples.

  • Uniqueness: Each NFT is unique and contains unique features. The rarer and more unique an NFT is, the more valuable it tends to be.
  • Blockchain: A collection of NFTs published on the Ethereum platform may be more valuable than a similar collection published on the Avalanche platform. The more valuable the publishing platform, the more valuable the NFT.
  • Rights of use: Some NFTs give their holder special rights, such as access to virtual events or the ability to use a digital object in a virtual world.
  • Media hype: NFTs have received much attention in the media, increasing their awareness and interest. Such collections include, e.g., Bored Apes and CryptoPunks.
  • Community: Many NFT projects build strong communities around them, which can increase their value.

The NFT market is very young and still searching for its value. Because of this, the value of NFT art can swing enormously from the top to the bottom of market cycles.

The future of NFTs

The possibilities of NFT technology are almost limitless. The gaming industry is guaranteed to be one of the beneficiaries of NFT technology in the future. How would the idea of owning all the items in your adventure game and being able to bring them in NFT format to a new version of the game sound? Will you soon be able to sell the diamonds or other items you collect in the mobile game on a cryptocurrency exchange?

In addition, NFTs offer huge opportunities in art and finance. Tokenized shares are a good example of how NFTs can be utilized.

The multi-chain world of NFTs brings interesting challenges from a technical point of view. What if a collection published on the Ethereum platform is also launched on the Solana platform? Or could CryptoPunks move to another blockchain in the future? How will ownership rights work, then?

NFTs are here to stay. The technology is already surprisingly old, but its breakthrough didn’t happen until 2021.

If you want to buy NFTs, check this article: How to buy an NFT at Opensea.

Antti Hyppänen

Antti Hyppänen is the founder and editor-in-chief of AboutBitcoin.io. Antti has written articles about cryptos since 2017. He follows the crypto market every day of the year and is responsible for the daily operations of AboutBitcoin. Antti is not a maximalist regarding any cryptocurrency but looks at the industry objectively. Antti’s investment profile is “buy & hold,” i.e., he does not trade or use leverage. His crypto portfolio consists of mainly Bitcoin and Ethereum. Antti also follows macroeconomic events. In addition to cryptos, his interests include gold, silver, and the US stock market.